Section 98 of the Bankruptcy Ordinance (which also applies to companies) allows the cancellation of transactions with those in insolvency. The provisions of this law may be disastrous for those who find themselves conducting business with companies in difficulties and in practice it may mean that rumors of rain are sufficient to cause drowning.
The background to the directives that prevent creditor preference is to ensure that the assets of a company in liquidation are distributed equally among the creditors, subject to the provisions of the law regarding the preference of certain creditors. The law requires four cumulative conditions for revoking the validity of a transaction because of a creditor's preference: A liquidation order was issued against the company (or a stay of proceedings order). On the date of the transaction, the company could not repay its due debts; the suspicious transaction was made in order to give preference to a certain creditor, and the transaction was made within the period of three months preceding the filing of the request for liquidation (or freezing of proceedings).
The main question that is usually discussed is whether the transaction was made with the intention of giving priority to the creditor, when the Courts held that not only is the intention to prefer a creditor sufficient and there is no need to prove fraudulent intent, but also that this intention can be deduced from circumstantial evidence. Generally, a transaction designed to improve the condition of an existing creditor or to pay for past debts (including refusal to supply goods, except after immediate repayment of a past debt) will be considered to be an improper creditor preference. In the case of the brothers Kaladi v. Kerem Athamaleh, for example, the Nazareth District Court concluded an improper preference for mortgages and vehicles that were worth much more than the amount of the new debt created in the transaction between the company and the creditor and the fact that the shareholder also holds assets as collateral for the company's debt .
However, the Courts recognized the need for a company in difficulty to raise financing when it is on the verge of abyss - financing called "financial oxygen" and even if it is close to the time of the company's collapse, will be considered a legitimate transaction. For example, in the Discount v. Gross case, a "financial oxygen" was recognized as a "financial oxygen" that was signed only 9 days prior to the request for liquidation, but this was signed after eight months of negotiations in which the Bank continued to provide financing. In contrast, in Caspi v. Ness - the guiding judgment in this area, the Supreme Court held that this was a preference for creditors, since the transaction was a memorandum of understanding aimed at signing a sale agreement, which was ultimately not signed within the 45-day period , but only a year and a half later, on the eve of the application for a stay of proceedings.
The Court held that "Where the transfer of the value from the company to one of its creditors prior to the liquidation or rehabilitation was part of an ongoing relationship between the company and the creditor that aims to inject financial oxygen into the company, the court will not dismiss the transaction as a preference for fraud , And the opposite is true: where the issue is an isolated transaction that is close to the time of the company's entry into liquidation or rehabilitation, and which is not part of a process for which the relevant creditor is a party to injecting financial oxygen into the company,
It is important to emphasize that the field of liquidation and receivership is a complex area, and each case must be examined according to its circumstances. Thus, before entering into a deal with a company in difficulties or a person on the verge of bankruptcy, it is important to consult a lawyer specializing in the field weighing all the known facts.